How did stocks and stock market sectors perform in the first week of Lula’s government?

It was a literal start to the year with ups and downs for the Brazilian stock market. Despite the closure of the first week of 2023 and the government of President Lula, down by 0.7%, to 108,900 points, the final balance can even be considered positive – given the volatility that has occurred in a few days.

After a series of decrees and provisional measures, the Stock Exchange opened the week with heavy losses, even dropping back to 103.9 thousand points, the minimum for the week, on Wednesday.

Together, it drove down the stock price of several sectors, such as fuel, banking, sanitation and state-owned companies.

However, the stock has recovered. This happened immediately after the words of the future president of Petrobras (PETR3;PETR4), Jean Paul Prates, who ruled out a price intervention.

Prates’ statement brought relief to the market. But she wasn’t the only one.

The civil housing minister, Rui Costa, was due to say mid-week that the government is not considering reviewing the reforms.

The comment occurred due to speeches by the new Minister of Social Security, Carlos Lupi, upon his inauguration, signaling that the 2019 Social Security reform could be revised.

Impact

“The reaction to the government’s first measures has been very negative, leading to a worsening risk perception, with a greater misalignment between the market and the government,” says João Lucas Tonello, investment analyst at Benndorf Research.

According to him, the “more orthodox populist measures” that undermined confidence in the fiscal framework contributed to the worsening perception of the new government, as well as the cancellation of “positive measures implemented by the old government”, such as privatization processes.

According to Enrico Cozzolino, partner and head of analysis of Levante Investimentos, the measures and the first declarations of the government can be classified as “catastrophic” and “bad”, which have raised the perception of risk.

“We have seen a lot of volatility (throughout the week), with many papers having very large changes,” he said.

“In general, the perception of the markets is negative,” said Luan Alves, chief analyst at VG Research, adding that, since the transitional government, Lula has adopted “a belligerent tone, different from the one practiced during his first two governments during who treated the financial market in a more pragmatic and friendly way”.

However, Alves pointed out that within the large number of negative signals coming from the government as a whole, there are some noises.

It is no coincidence that this was one of the points addressed in the first ministerial meeting of the government this Friday: setting the tone for positions and speeches.

“The comments and observations of the members of the ministries are not sufficient conditions for the implementation of public policies or regulatory changes, which would pass both from the President of the Republic and from Congress,” added Alves.

Actions

Regarding the performance of shares this week, the VG Research specialist points out that the market, in general, was already down, but state-owned companies, more sensitive to political risks, have experienced greater volatility in early 2023 .

“The intention of the elected government to extend the exemption from fuel taxes, established by the Bolsonaro government, has penalized, in the last stock market sessions, the quotations of companies operating in the ethanol sector, such as Cosan, Jalles Machado and São Martinho, for example,” he said.

Meanwhile, the newspapers that performed well in this first week were due to problems beyond the government’s control, such as foreign demand, raw materials such as pulp and paper, mining and steel, which benefited from the increase in the dollar or Chinese economic opening, after the worst period of Covid.

“We have many companies with a lot of value, very discounted, cheap, such as banks,” adds Cozzolino, referring to factors that can induce investors to buy.

Now watch a summary of how the first measures and statements by the Lula government have impacted sectors and companies on the stock exchange:

Sugar and alcohol

Sugar and spirits companies were among the biggest decliners for the week, with São Martinho (SMTO3) leading the declines, with a 14.97% loss, followed by Raízen (RAIZ4), with minus 13.90 %.

“The decision by the newly elected Lula government to extend the fuel tax holiday for another 60 days is the reason for this,” wrote Morgan Stanley in a report on São Martinho’s performance in the first trading sessions of 2023.

In the analysis, Morgan highlights risks associated with possible new government policies, such as changes to the tax code or regulations, which explain part of this decline in activity.

Especially with regard to ethanol prices, the expectation is that the measure could lead to an increase in its ratio to petrol prices, currently between 77% and 78%. It should be noted that ethanol becomes profitable when it is less than 70% worth of gasoline.

The reaction also came from the Union of the Sugar Cane Industry and Bioenergy (Unica), which expressed its discontent with the government, asked for explanations and threatened to go to court.

Banks

Another sector that shook in the first week of the Lula government was the financial sector. Assuming the Ministry of Social Security, Carlos Luppi, on Tuesday (3), declared that he considers the interest rates on payroll loans, intended for pensioners of the INSS, to be high.

Present at the inauguration, the message struck a chord with the president of the Brazilian federation of banks (Febraban), Isaac Sidney, who tried to place himself at Lupi’s disposal to show the minister how the market works.

For the market, the message was a manifestation of possible rate intervention, since interest rates depend on structural and technical factors for the formation of bank spreads.

The next day, Sydney already met with Finance Minister Fernando Haddad on a courtesy visit, where he provided the government with an overview of the credit market. And, of course, he voiced the industry’s concerns.

Revolving ceiling and debt renegotiation

Two other items that should remain on investors’ radar are plans seeking to institute an interest cap on revolving credit, as well as the debt rescheduling program itself, which the government intends to implement.

For Itaú BBA, there is still a long way to go before the revolving cap project is approved, but, if approved, “it would have a negative impact on the bank’s card business and indirect impacts on other credit lines and services”, they evaluate. .

Financial index

The stock market financial index (IFNC), after falling by almost 5% in the middle of the week, closed the period down by almost 1%.

IFNC rebounded from midweek lows

Among the banks, the one with the worst performance of the week was Bradesco (BBDC4), with less than 0.5%; Santander (SANB11) advanced 3.8%.

state property

Another group of companies it shook up was state-owned. Looking at companies with government shares, the companies lost BRL 31.167 billion in market value in the first trading session of 2023.

Watch the individual performances on January 2:

• Petrobras (PETR4): -R$ 22.7 billion;
• Banco do Brasil (BBAS3): R$ -4.28 billion;
• Eletrobras (ELET3;[ELETT6]): -R$ 3.428 billion;
• Caixa Seguridade (CXSE3): -R$690 million;

An additional factor happened to Petrobras and Banco do Brasil. At the turn of the year, the government indicated the changes in the high command of the two companies and appointed Senator Jean Paul Prates to Petrobras; and in Caixa, Tarciana Medeiros.

At the end of the week, Petrobras preferred shares closed down 3.1%; the ordinary and preferred shares, respectively, of Eletrobras, with decreases of 2.6% and 2.4%; Caixa Seguridade returned 3.4%; while those of the Banco do Brasil rose by 0.9%.

Petrobras

Especially in Petrobras, the mood with the company’s shares reversed after speeches by Prates on Wednesday (4) saying there will be no intervention on fuel prices by the state, sending the company’s shares soaring – after coming close at the lows of the week.

According to him, saying that the import parity price (PPI) is about to end “does not mean at all that we will dissociate ourselves from international fluctuations”.

“Only that you will use more the fact that you produce internally in favor of the Brazilian economy,” he added.

See changes in Petrobras shares (PETR4) for the week

Disinfection

Another sector with volatility in the first week of Lula’s government was sanitation, after an interim measure that removed the regulation of the sector from the powers of the National Water Agency (ANA).

Faced with the reactions of the sector and the market, the Civil House has decided to review the announced measures.

However, the government intends to hold a discussion on the new framework for the sector, approved and sanctioned by the Bolsonaro government.

Even as companies’ market values ​​declined and improved, major sector stocks ended the week lower: Sabesp (SBSP3), -3.9%; Copasa (CSMG3), -2.8%; Sanepar (SAPR4), -1.5%.

Weapons

Finally, in one of its first acts, the government drafted a decree revoking regulations that facilitate access to firearms, such as registrations for the acquisition, transfer and new concessions for the use of firearms.

The decree ended up affecting Taurus (TASA4), as it was not intended to use this mechanism. In a statement published in the latest budget, Taurus assessed that “it was not a feature of this government (PT) to legislate by decree”.

However, what may cushion the impact of the greater restriction on domestic sales is abroad. From January to September last year, R$ 1.290 billion in revenues came from the foreign market and about half from the domestic market, with R$ 652 million.

Despite the initial decline, Taurus shares recovered some of their losses, but not enough to end the week down 6.3% to R$12.50.

In favor of the company is the payment of dividends, which can reach a dividend yield (dividend in relation to the share price) of around 15%.

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